Colossal Failure Of Common Sense Part 15

As had occurred once or twice in the past, the sudden telephonic arrival of Larry McCarthy put things into perspective.

"Hey buddy, what's up?" he said.

"Oh, hi, Larry."

"What are you doing?"

"Nothing."

"What do you mean, nothing?"

"Well, thinking."

"Bulls.h.i.t. You gotta get your a.s.s in gear."

"Who, me?"

"Sure. You and I got some serious trading to do. Come on. You just got fired, you got money all over the place."

"Well ... I was just-"

"Jesus, Larry. Let's get steamed in. Bear nearly went, and we oughta start shorting these banks all the way down to zero. If we'd had a lick of sense last week, we would have done Bear Stearns."

"But we-"

"But bulls.h.i.t. We don't need Lehman. We just get stuck right in there as if nothing had happened. Let's trade, buddy, trade. Short those stupid banks."

That Larry. He had a way about him. And although we would operate on a smaller scale than when we were risking Lehman's capital, we could still operate. I couldn't make $30 million, but I bet I could make $3 million. In fact, McCarthy and I would still be a pretty decent team. Lehman might have taken our platform, but they could never take our knowledge and our judgment.

And, speaking of knowledge and judgment, there was another billion-dollar event that very same week that shed a glaring light on some of our old adversaries during those turbulent early-warning days of the subprime. Dave Sherr, the forty-four-year-old Lehman mortgage chief who was so dismissive of the opinions of Larry McCarthy and Mike Gelband, suddenly left to start up his own hedge fund.

Now, Dave is not that bad a guy-misguided, but a decent enough character who was merely defending his own territory. To the death, that is. To the rip-roaring, spitting anthem of the guns, to the corporation-wide memorial service for the securitization process and CDOs. And I should mention he was being constantly leaned upon by Joe Gregory and his fellow bullies on the thirty-first floor. Dave may or may not have believed, but he sure as h.e.l.l understood he needed to do as he was told.

And now, presumably with the blessing of the Lehman board, he had decided to go it alone. On March 20, 2008, Dave Sherr announced the launch of his hedge fund, named One William Street Capital Management. It was t.i.tled after the address of the fabled old Lehman Brothers headquarters, where Bobbie had sipped the finest red Bordeaux surrounded by his beloved Old Masters. Dave was starting with his back to the wall as well as a ma.s.sive investment from Lehman, rumored to be in the region of half a billion dollars. A strange Lehman investment in yet another hedge fund, given Bear Stearns being on death's door. Dave still believed that the mortgage market would rise again. He believed it was all at rock bottom, that the mortgage securitization market would make a storming comeback and CDOs would recover. All those times he had defended his little redoubt under withering attack, he had really thought it would all happen again and that he would once more make a fortune for his employers.

While Larry and I thought he might be wrong, and neither of us would have traded places with him, we both sincerely wished him well in his new venture; after all, we were indirectly investors in his fund through our Lehman shares. Dave had elaborate new offices on the thirty-ninth floor in the Time-Life Building on Sixth Avenue, opposite Rockefeller Center.

Like Julius Caesar, Lehman misjudged the Ides of March. On Sunday night, David Einhorn, the president of the hedge fund Greenlight Capital, was preparing a presentation that he would make to investors on Tuesday, April 8, 2008, at the Grant's Spring Investment Conference. And what a little ripper that was.

He started off with the minor criticism about the "cult following" historically enjoyed by Lehman management. He accused them of arrogance and took a dim view of their standards of disclosure, transparency, and cooperation with the investment community. He reminded anyone who was listening that mortgage originations and securitization had represented between 30 and 50 percent of Lehman's profits these last few years.

These observations were not being made by an average economist. Einhorn had a brain the size of the Coeur Defense. At Cornell University he graduated summa c.u.m laude with distinction in all subjects.

He described Lehman's position as "dangerously exposed." But he regarded their global commercial real estate portfolio as a far bigger problem, and he pointed out that Lehman had more than 20 percent of its real cash tied up in the debt and equity of one single transaction, Archstone-Smith, with their 360 luxury apartment buildings and top-of-the-market price of $22.2 billion.

Anyone who had seen the presentation or read his monthly letter to investors so far understood that David Einhorn had not merely blown a whistle on the sleight-of-hand accounting Lehman was apt to pull. He'd borrowed a ship's klaxon, gone to the top of the five-hundred-foot-high Grand Central Tower above his East 45th Street office, and sounded the retreat for all to hear.

David's letters were eagerly awaited doc.u.ments. He sometimes broadcast them, occasionally chatted about them to CNBC reporters, and quite often gave lectures based upon their content. The presentation he penned on that March evening might as well have been a hand grenade as far as Lehman was concerned. David Einhorn pulled no punches.

He said he had been shocked to see that in January Lehman had increased its dividend and spent $750 million to repurchase 19 percent of the outstanding public shares. He noted that in the quarter ending February 2008, Lehman managed to increase balance sheet a.s.sets (stocks, bonds, LBO corporate debt, CMBS, RMBS, et cetera) by another $90 billion.

"I estimate Lehman's ratio of a.s.sets to real tangible common equity to have reached 44 times," he wrote. That plainly calculated to a $748 billion a.s.set risk over the real capital of $17 billion.

He complained that Lehman did not disclose the valuation it used on the Archstone investment. David stressed that commercial real estate prices had fallen 15 to 25 percent since the deal was announced. He found it "strange" that Lehman's realized and unrealized a.s.set gains for the year were actually up by $400 million. Whoever else believed Callan's numbers, David Einhorn, one of the world's finest stud poker players, was not among them. Erin had not, after all, reported any kind of a loss yet.

In Einhorn's opinion, Lehman was "hiding" multibillion-dollar losses. And he stated that Lehman responded only "grudgingly" when asked for improved a.s.set valuation transparency. And if they ever did provide that transparency, he wrote, "I suspect it would not not inspire market confidence." inspire market confidence."

David's presentations should be read by every would-be Wall Street trader, a.n.a.lyst or investment banker. "The problem with 44 times leverage is that, if your a.s.sets fall in value by only 1 percent, that's half your real tangible equity. Remember Lehman only had $15 billion. Multiply that by 44 and you have $660 billion. Drop that by 1 percent and that's $6.6 billion. Right then that 44 times leverage becomes 80 percent. And all confidence is lost."

David already knew about Lehman's projected raising of $4 billion in capital in the next few weeks. In his opinion, investors were about to be duped, and the SEC, to avoid a crisis, was "turning a blind eye at Lehman's accounting." David's question on this issue was simple: "How can you raise capital without disclosing losses?"

He had noticed Lehman's reporting of losses was "consistently smaller than one might expect." There was always a modest profit that slightly exceeded the a.n.a.lysts' estimations. Not reporting any loss "smelled," in David's opinion.

This was a sensational enemy for d.i.c.k and Joe to have antagonized-an enemy who, in the not too distant future, would go on national television with CNBC's Maria Bartiromo and, quoting this very letter, spill the beans about Lehman's true situation. And remember, Lehman, like any major force decimated of its best commanders, was in a thirty-first-floor turmoil, with lesser men grabbing at the helm and a commanding officer who barely understood the complexities of derivatives.

Right now, the firm was down to the wire in its unspoken desperation to get some cla.s.s men onto the bridge. There were just a few left, and their backs were to the wall, trying to cope with the beleaguered chairman and president.

There was Tom Humphrey, a man with twenty years' experience at the firm, now the global head of fixed-income sales, with hundreds of people reporting to him. Perhaps even more important, there was Bart McDade, the rising power on the executive committee, which had for so long been the private domain of d.i.c.k and Joe, easily malleable, without any backbone of its own.

There was a sea change going on at Lehman, and the rise of Bart McDade was at the heart of it. People liked him, and there were many who felt he should be swept to power in some kind of a palace coup. Perhaps his closest and most important confidante right now, in the absence of Mike and Alex, was Tom Humphrey, a genial, gregarious, hugely popular man whose sunny demeanor hid a street-smart brilliance and a calculating turn of mind. d.i.c.k Fuld and Joe Gregory knew that Tom Humphrey was a loyal, decent, and very smart man. What they never suspected was that Tom Humphrey was a card-carrying revolutionary who thought the pair of them might be out of their depth and no longer qualified to command the country's fourth-largest investment bank. Tom's close-knit group of friends were Mike Gelband, Alex Kirk, Bart McDade, and Larry McCarthy. He was one of us, and had been right at the heart of the mutineers' group that had for so long tried to curb the excesses of the Lehman leadership. Tom was less obvious than someone like Larry, but the flame of righteousness burned deep within him, and he was moving closer to the fulcrum of power with every pa.s.sing week, his sword drawn.

Lehman's problems were mounting. But the biggest one was named Einhorn. Late in May he had given another speech of such paralyzing clarity that Lehman's stock went down 12 percent. David had decided he was not being told the truth. He did not believe Erin Callan's numbers and he wanted answers. But it was his obvious skepticism that did it. For the first time, publicly, the morals of the historic investment bank were being questioned. And everyone was talking about it.

On May 27 David was invited to an interview with Maria Bartiromo on CNBC during which he reiterated that Lehman had not provided specific disclosure and that it was up to them to provide much greater transparency.

"For the last six months," he said, "Wall Street has been playing a game of Who Has CDOs? And I think it's very peculiar that the first time a $6.5 billion pool of CDOs was disclosed by Lehman, it was very quietly on page fifty-six of their 10Q form filed months after this crisis had started." He told Maria he had grilled Callan and that "sometimes she refused to comment one way or another. But I do have a good responsibility to get my facts straight before I speak."

He added archly, "There is not enough disclosure here to know how bad the problems are. The numbers they reported didn't really reflect the full magnitude of the credit crisis. I think the risk-reward in the stock is poor from a long perspective. So we are short."

He wondered what incentive there was for companies to tell the truth. And he concluded with this d.a.m.ning statement: "And they seem to be upset that I've raised valid questions to which they do not have answers."

His previous week's comments had been bad, but this was a nightmare. There were many departmental heads who were now concerned. All of them had visions of their own stock diminishing by the week. David Einhorn, not only a hedge fund boss but also an author of considerable repute, plainly could not be stopped or silenced. Something had to be done.

By now, Bart McDade was being openly discussed as the near-certain successor to Joe Gregory as president. Constantly flanked by his great supporter, Tom Humphrey, the two of them were seen in conference often. And to no one's surprise, it was Tom who suddenly made the key move.

He invited twelve of his senior colleagues to a secret dinner at a private members' dining club on the Upper East Side on June 5. They were all from floors two through five, the floors that now formed the engine room of Lehman Brothers, so great was the financial world's mistrust of the thirty-first. The food was lavish, the claret would have met with the approval of Bobbie Lehman himself, and the bill was $7,000. There was one notable absentee among the a.s.sembled Lehman executives, though: Bart McDade, who, politically, could not make it.

Gerald Donini, who was the favorite to replace Bart as head of equities, was there, as were Eric Felder, global head of credit products; Skip McGee, head of investment banking; Jeff Weiss, a major investment banker with a place on the executive committee; and Richard McKinney, who had replaced Dave Sherr as head of global securitized products. Their stated objective was to figure out ways to help, to turn the ship around, to quell the headlong rush for growth as advocated by Joe Gregory, and, if possible, to allay the fears of David Einhorn. For that gimlet-eyed a.n.a.lyst had caused the Lehman management's credibility to plunge into free fall, with the concomitant danger that the firm would become a Wall Street pariah. The mood was, they told me, polite but fearful.

But the Bordeaux played its soothing role in freeing up inhibitions, and it swiftly became apparent that this select gathering had all the necessary qualities to provoke the most thoughtful and genteel of corporate riots. And as academic discussions became intermingled with profoundly held opinions, which were in stark contrast to those on the thirty-first floor, the mood changed. By the time Tom Humphrey began to pa.s.s around a decanter of rich vintage port, it had become blatantly obvious that drastic action was called for.

Either d.i.c.k Fuld or Joe Gregory had to go. Together they formed a duo that could no longer be trusted, princ.i.p.ally because it seemed neither of them could stand to be among truly clever people. d.i.c.k retreated from them, while Joe, under threat or dissent, tended to evaporate his enemies. Generally speaking, that had proved over the years to be a lot of evaporation.

Fuld, blissfully unaware of the wrath to come, might have done better to have remembered his Shakespeare: Uneasy lies the head that wears a crown Uneasy lies the head that wears a crown. Because at that dinner, in his absence, the divine right of kings was challenged and his iron grasp on power was irrevocably loosened. The men who should have formed his palace guard were, at long last, moving against him.

They did not intend to remove both him and Gregory, because of the crisis mode such action would provoke. But one of them was most certainly going, and so was d.i.c.k's longtime henchman David Goldfarb, the global head of princ.i.p.al investing, who had been right at the forefront of the ma.s.sive property and hedge fund deals the firm had done in Europe and beyond. A former CFO, "Decouple Dave" was heavily under the influence of Fuld and Gregory, with all of their wild expansion plans. He had been shoulder to shoulder with Mark Walsh right at the sharp end when they bought billions of dollars' worth of a.s.sets in London, Paris, Australia, Asia, and even India. h.e.l.l, he would have sanctioned the purchase of the Taj Mahal as a commercial property if it had come on the market.

And now they were going to clip his wings. The men with the wide horizons and limited intellects had only days to go before each was issued a short but compulsory leash. d.i.c.k Fuld and all of his cronies were facing the final roundup.

Four days later Lehman published its second-quarter earnings, and in response to the laser-powered searchlight of David Einhorn's probing, they admitted a $2.8 billion loss. In just a few months they had given back just about all of the 2007 gains, the first negative quarter in fourteen years. Down went the stock another 20 percent, making it 65 percent lower for the year.

There was now an urgency about sweeping the forty-eight-year-old Bart McDade to power. The tall, bespectacled head of equities was currently the most respected guy in the firm. He and Mike Gelband had been roommates at the Ross Business School at the University of Michigan. They had similar intellects, and both had stupendous track records. The way Bart had transformed the equities division from a ho-hum department into a Lehman Brothers powerhouse remains a legend.

As affable as Bart was, he was still full of unexpressed anger over the shameful treatment Mike had received. He believed that together he and Mike could have swerved the Lehman ship away from the iceberg. An immensely wealthy man, Bart lived on a spectacular waterfront cove in Rye, New York, right on Long Island Sound. He was a scratch golfer and board member at the prestigious Wingfoot golf club and had long threatened to retire and play the fifty greatest courses in the world. And right now he was hovering on the fringe of power at Lehman Brothers.

Two days after those earnings were announced, on Wednesday, June 11, he was in his office when Tom Humphrey arrived for an informal but historic chat. "We have enough support for this move, Bart," said Tom. "And I think you should make it."

Bart nodded curtly, shook Tom's hand, and walked straight to the elevator that would take him up to the thirty-first floor. He made the journey alone, and when he emerged from the elevator, he made straight for the great wooden doors that guarded the inner sanctum of Lehman Brothers, the sprawling private office of d.i.c.k Fuld, situated right in the northwest corner with views to the Hudson River. It was exquisitely furnished with antique chairs and tables, clocks, bronzes, and paintings, and it took up approximately one-quarter of the entire executive floor.

Bart strode right past the reception area, past the library, and into the office, where Fuld sat behind a huge mahogany desk. The longest-tenured CEO in the history of Wall Street looked up, slightly startled. Bart dispensed with formalities. He said straight out, "This firm has to make a change. The division heads are unhappy with the leadership right here on thirty-one. And the investment community has lost a degree of confidence in our stock."

Fuld, predictably, was furious. He summoned up a pugilistic expression, drawing on his bottomless wells of anger and resentment, that air of suppressed violence that had gained him so many boardroom victories and lost him so many friends.

"What the h.e.l.l is all this about?" he snapped, barely controlling his temper.

And Bart, in that straightforward way of his, calmly explained that twelve of the most critically important departmental heads of the firm had met six nights before, and reached the only reasonable conclusion there was. If Lehman was to survive, a drastic change was required at the top. The present situation could not be permitted to continue.

"This was done behind my back!" yelled d.i.c.k, somewhat unnecessarily. He looked as if he might lose control. But Bart was not thrown off course. And now, for the first time, he was holding all the aces as he faced the Lehman boss.

"We have to do the right thing for the firm and the shareholders," he replied, and he issued the first ultimatum Fuld had heard in thirty years at the helm. Bart told him Joe Gregory was finished. He had to go. "Either that or ..."

"All right," said Fuld through gritted teeth.

d.i.c.k Fuld met the fates with untypical acceptance. He knew that his devoted buddy Joe Gregory would face a corporate firing squad that afternoon. And d.i.c.k, a man who loved military similes and referred to Lehman's staff as his "troops," had no alternative but to accept the verdict of the court-martial that had taken place in a private dining club six days previously.

Fuld was squirming in his chair. He looked up at Bart and said, "You'll have to tell Joe. I won't do that." And perhaps for the only time in all those long years, the king of Lehman appeared deflated. The trademark pugnacious expression that had frightened the life out of generations of executives was suddenly gone. And, briefly, the fire died in those dark hard eyes. d.i.c.k was a trim, athletic man who stood only five foot eight, but to the few people who knew him, he often appeared to be ten feet tall. To Bart McDade just then, though, he looked about five foot two, slumped and diminished, his reign drawing to a close.

McDade left and walked along to the office of Joe Gregory, tapped on the door, and entered. Joe looked up, and again Bart made no attempt at small talk or pleasantries. He said, "Joe, you've done an admirable job behind diversity and philanthropy. But we're coming into a fierce storm here, and the department heads are not happy with your leadership. I've talked to d.i.c.k, and even he agrees we have to make a big change right here."

"What kind of a change?" demanded Joe, his hackles rising, his mouth turning down at the corners, the way it did when he entered defensive mode. "What are you talking about?"

"We think you should go."

"Go? What d'ya mean, go? I'm the president of the corporation. I've got millions of dollars of shares. What do you mean, go?"

"We have a new capital raise," countered Bart. "Four billion dollars, and the market is losing confidence in you and d.i.c.k. I mean, we just lost $2.8 billion. And your departure will help restore some faith."

Joe Gregory exploded. "What the f.u.c.k is this all about, Bart?" he yelled. "What's going on? Who the h.e.l.l do you think you are?"

"Joe, believe me, I have the support of the departmental heads."

"Support? What are you talking about, support?" bellowed Joe. "This has to come before the executive committee."

"For the purpose of this discussion, Joe, I am the executive committee. Trust me, it's over."

"Well, when does the f.u.c.king committee meet?" roared Joe. "That's what I want to know. And I want answers."

"This afternoon. Three o'clock," replied Bart. "There will be a senior management meeting. It's just to complete the formalities. Don't doubt me. The divisional heads are united on this."

And so the final hours of the Fuld/Gregory duopoly rolled slowly on. At 3:00 P.M. P.M. the highest managers at the firm met in the large thirty-first-floor conference room. All the Lehman heads were there: many who had attended the court-martial dinner, plus Bart, Erin Callan, and the two main Lehman rulers, with d.i.c.k at the head of the table. the highest managers at the firm met in the large thirty-first-floor conference room. All the Lehman heads were there: many who had attended the court-martial dinner, plus Bart, Erin Callan, and the two main Lehman rulers, with d.i.c.k at the head of the table.

Bart stepped straight into the breach, outlining the gloomier aspects of the firm's position in the market. Skip McGee, head of investment banking, a powerful and popular leader, spoke in support of Bart, again making the irrefutable point that without a major change in the chain of command, Lehman might face an uncertain future.

Suddenly, from out of the clear blue yonder, Joe Gregory stood up and motioned to Erin, who, I am told, looked absolutely shocked. He said quietly, "For the good of the firm, Erin and I should step down," and gestured first to Erin and then toward the door. Some felt at that moment that Joe Gregory's peremptory announcement that Erin would step down with him was a complete shock to her and done without her knowledge. This would, conveniently for Gregory, allow the embarra.s.sing spotlight to be shared, taking some of the glare off his failures. Erin was subsequently offered her previous position as head of hedge fund investment banking.

The remainder of the committee watched in silence as they stood up and gathered their papers. According to my many close friends in that room, they did not precisely link arms, but together they walked off into a Wall Street sunset with their avowed and true ally, Richard Fuld, glowering at his a.s.sembled troops, knowing that he too might face the executioner's axe before he was very much older.

12.

Fuld, Defiant to the End "I've been in my seat a lot longer than you were ever in yours at Goldman," Fuld retorted. "Don't tell me how to run my company. I'll play ball, but at my speed." The Treasury chief glowered, and quite possibly at that moment, Lehman's fate was sealed.

DESPITE HIS OUTWARDLY calm demeanor in the conference room, Joe Gregory did not go quietly. Several observers said that there were "fingernail marks etched on the top of his desk." The fifty-seven-year-old deposed president closed the door behind him and his footsteps were not heard again. No one in the conference room spoke, and the men around the table waited for a few moments in silence. And then, with whatever dignity he could manage, Richard S. Fuld, a member of the Lehman board of directors for twenty-five years, stood up and without a word followed his oldest friend out into the limbo of the thirty-first-floor corridor. calm demeanor in the conference room, Joe Gregory did not go quietly. Several observers said that there were "fingernail marks etched on the top of his desk." The fifty-seven-year-old deposed president closed the door behind him and his footsteps were not heard again. No one in the conference room spoke, and the men around the table waited for a few moments in silence. And then, with whatever dignity he could manage, Richard S. Fuld, a member of the Lehman board of directors for twenty-five years, stood up and without a word followed his oldest friend out into the limbo of the thirty-first-floor corridor.

Bart McDade, who was already standing, walked around the table and moved his papers to the place occupied for so long by the reclusive CEO. There was no acknowledgment of the dramatic usurping of power that had just been enacted. But when Bart finally took his place in the big chair, he became president of Lehman Brothers after an almost bloodless coup d'etat.

Bart immediately called for a meeting of all key Lehman leaders, the more than 300 managing directors, the true brains and brawn from floors two, three, four, and five. They were the hub of the firm, the driving force that never once in all the recent strife had failed to make a profit. When they arrived, there was no celebratory mood among them, just expressions of the warmest possible wishes for the man they had unanimously selected to lead them: "Well done, Bart." "Everyone's with you." "We'll back you all the way, anything you need." Three of them just said, "Thank G.o.d."

Power had been transferred, and Bart's immediate objective was to place key people in their best possible positions. Erin, though, was a problem. Bart didn't immediately realize how embarra.s.sed and distraught she was at that time and that she felt in her heart that it was time to leave Lehman, even though offered her previous position. Within days she left for her home in the Hamptons, where she spent the rest of the summer contemplating her fate. What he did realize was that she had been a mere p.a.w.n in the hands of d.i.c.k and Joe and had signed on April 8, 2008, the declaration prescribed by the Sarbanes-Oxley Act, the one in which both CEOs and CFOs had to swear they were telling the truth and hiding nothing when the corporate accounts were presented. That issue would crop up later.

Meanwhile, one by one, Lehman's senior managing directors went back to their desks, leaving the president alone for a while with his thoughts. He believed Lehman's debt problems were ma.s.sive, and he needed men who understood that with the same clarity he did. There were a lot of very good people at Lehman, but the two he wanted most were the two who had been too clever for Fuld and Gregory, two men whose brilliance had made them unacceptable-Mike Gelband and Alex Kirk. There were several others, of course, including Larry McCarthy, but in Bart's mind the two indispensable ones were Mike and Alex. Either one of them could have run the Federal Reserve if asked, and Bart knew he needed them back. Both of them. Right away.

He returned to his regular office on the second floor and immediately began to organize a meeting. In the end, the three of them fixed it for 2:00 P.M. P.M. the following Tuesday, June 17, at Alex's apartment on the Upper West Side. In the ensuing days, Bart's appointment as president was made official, and Fuld had been compelled to agree that the new boss should have free rein to run the corporation precisely as he wished. They always say a surrendering general never has any fight left in him. But this was a surrendering king, and he had even less. the following Tuesday, June 17, at Alex's apartment on the Upper West Side. In the ensuing days, Bart's appointment as president was made official, and Fuld had been compelled to agree that the new boss should have free rein to run the corporation precisely as he wished. They always say a surrendering general never has any fight left in him. But this was a surrendering king, and he had even less.

Bart was in charge, and in his own mind he had one brief: to unload the insane long positions Lehman had in residential mortgages and commercial real estate. He thought that just might be possible if he could persuade Mike and Alex to rejoin the firm. But the unspoken dread that haunted his dreams was that Lehman might be so long on concrete it could never be sold. At least not in time. Not with real estate values plummeting all over the globe.

At precisely two o'clock on Tuesday, Bart and Mike arrived at Alex Kirk's apartment. The three old friends, whose words of wisdom had fallen for so long on deaf ears up on the thirty-first floor, were quickly united in a genuine, collective desire to save Lehman Brothers. They were also united in their belief that Lehman had never been rotten at the core, just at the head.

Bart had to take back that executive committee which was unused to challenging anything and had for years been totally under the high-paid spell of d.i.c.k Fuld and Joe Gregory, allowing itself to be led, blindfolded, into deep, turbulent, and possibly life-threatening waters.

Bart told Mike and Alex, "I believe with you two on board we could make it happen. We have sixty years of experience between us, but most of all we have trust. And we have the talent and skill to undo years of destruction." And Alex and Mike said almost in unison, "I just hope we're not too late."

Bart pulled no punches. He outlined the grotesque scale of the problem, highlighting the fact that the firm's balance sheet kept getting deeper and deeper into debt as the corporation tried to hold subprime and Alt-A mortgages that could not be securitized. Lehman had been taking on $5 billion a month in residential mortgage originations. So far as Bart could tell, with as yet only a cursory glance at the books, there was $80 billion worth of mortgages on the books that could not be shifted.

"Right now this firm needs some adult risk supervision," Bart said. "And you two are the best there is. We have to clean up twenty-four months of reckless growth with little regard for risk management."

Mike and Alex both knew the devils that had governed the decline of d.i.c.k and Joe: too many inexperienced risk takers at the helm, and too much personal, twisted envy directed toward Goldman Sachs and Blackstone, all of it at the top of the market. But that did not lessen the shock of facing Lehman's almost three-quarters of a trillion dollars of pure, unadulterated risk.